How Natural Gas Fuels the Dow

Caterpillar plows forward with natural gas engines.

After a sizzling start to the year, the Dow Jones Industrial Average(INDEX: ^DJI) caught an unshakeable illness in early May and erased nearly all of the year's gains. The index's fall from grace has been swift and inglorious, and primarily a result of the European turmoil that never seems to disappear. For certain Dow components, especially highly cyclical companies, the roller-coaster ride has been even more exhilarating -- and devastating at the same time. Investors in the fourth largest Dow component, Caterpillar(NYSE: CAT), know this all too well.

Caterpillar's rocky roadCaterpillar's sales lurch wildly with the peaks and valleys of the broader economy, and any sign of a slowdown at the equipment maker could cast a dark cloud over global markets. Experts even reference sales of the equipment giant when forecasting expected economic growth for the next six to nine months. If Caterpillar sneezes, in other words, the rest of the world catches a cold.

Obviously a dismal macroeconomic picture can crush Caterpillar's stock price, but investors in this industrial giant should nonetheless have a reason to cheer today.

Natural gas: no longer nicheNearly a year after pondering various opportunities with Canada's Westport Innovations(NYSE: WPRT), Caterpillar announced that the two companies would work in tandem to develop natural gas engines for Caterpillar's heavy duty trucks and locomotives. The bold initiative sparked a rally in Caterpillar's stock, up 0.5% on the day, and sent Westport share's soaring more than 20%. The market's enthusiasm, while unsurprising, coincides with one of the broader storylines developing this year: Investors are practically gushing over natural gas.

It's true, and it's warranted given the widespread global implications. As one writer for the Financial Times put it when discussing the newfound enthusiasm over natural gas:

If such optimism proves right, the implications would not only be far greater than those of the eurozone's painful dissolution, but would also be economically positive. Never forget that ours is a civilisation built on cheap supplies of commercial energy. The economic rise of emerging countries is bound to make the demand for commercial energy increase dramatically in the decades ahead. Gas matters.

Gas does matter, and Caterpillar's announcement provides another strong endorsement for natural gas transportation. For investors who missed out on previous developments, Caterpillar's venture follows in the wake of other notable Dow components, including 3M(NYSE: MMM) and GE(NYSE: GE), which tossed their hats into the natural gas ring recently.

Both 3M and GE introduced new technologies to propel a natural gas future in transportation and, coincidentally, teamed up with the same natural gas producer in Chesapeake Energy. All three companies aim to lower the ownership and operational costs for natural gas vehicles to capitalize on rock-bottom prices in the United States. Not a bad move considering the International Energy Agency's announcement today: Gas demand will rise 17% by 2017 because of Asia's ongoing boom.

Foolish takeawayCaterpillar's collaboration with Westport signifies a small step forward in the adoption of natural gas engines, but it further emphasizes the importance of commercial energy to the global markets. When energy experts refer to America as the "Saudi Arabia of natural gas," you have to expect the major players to leap at the opportunity. While the Dow offers exposure to interesting natural gas developments, our top analysts identified a smaller energy player that could be an even better addition to your portfolio. Uncover this stock pick in our free report, "The Only Energy Stock You'll Ever Need." We're offering it for a short time, so go ahead and download your copy now.

Author

Isaac covers the companies that constantly push the world forward, from the engines of innovation like GE and Google to the rule breakers like Chipotle and Whole Foods. He admires the leaders that embody the philosophy of Conscious Capitalism.
Follow @TMFBoomer